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Liquidation of Financially Distressed S Corporations: Mastering Tax Implications of Liquidating Distributions

Case Studies on Planning, Calculations, and Property Dispositions

Note: CLE credit is not offered on this program

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Wednesday, January 6, 2021

Recorded event now available

or call 1-800-926-7926

This course will delve into case studies on the planning, tax calculations, property dispositions, and dissolution filings required to liquidate an S corporation, particularly those in financial distress. The panel will provide a briefing on the general rules stated in IRC Section 1371 tying liquidation rules back to those applying to C corps, detailing the gain or loss on distributions in exchange for stock, and outline scenarios illustrating the rules in action.


S corporation liquidations generally are subject to the same rules as C corporations. However, the lack of entity-level tax creates different tax considerations. In some cases, there may be some corporate level problems, such as the built-in gains taxes. Tax advisers must be aware of the Subchapter C rules, especially those concerned with gain or loss recognition on the distribution.

Also, Subchapter S contains rules concerning the pass-through character of income, gain, and loss. Consequently, tax professionals advising the corporation and its shareholders must calculate the tax impact for shareholders, who ultimately bear the tax burden of the liquidation.

Crucial to tax-efficient planning in S corp liquidation situations is the accurate calculation of S shareholders' "outside" tax basis in their shares and the S corporation's "inside" tax basis in its assets. Advisers must have a comprehensive basis schedule for all shareholders. Other special rules concern the distribution of installment receivables, debt instruments held by shareholders.

Finally, there are some special considerations for unsuccessful corporations. Because a complete liquidation will cause any shareholder's suspended losses to be extinguished, the timing of the liquidation is a significant issue in planning.

Listen as our experienced panel provides a detailed examination of the tax rules and planning considerations to address in the dissolution and liquidation of S corporations and offers case studies to illustrate tax treatments to shareholders under various liquidation scenarios.



  1. Liquidating a distressed corporation
    1. Preserving S corporation status until the end
    2. Cancellation of debt of S corporation
    3. Timing of cancellation of debt
  2. Impact of shareholder guarantee of debt
    1. Release from guarantee vs. cancellation of debt
    2. Payment of obligation by shareholder
  3. Settlement of debt to the shareholder: ordinary vs. capital loss
  4. Liquidating distributions
    1. Loss limitations of corporation
    2. Loss limitations of shareholder
    3. Timing of distribution


The panel will discuss these and other key issues:

  • What are the rules for recognizing income and losses in the year of liquidation of the S corporation?
  • How does the S corporation report liquidating distributions of installment receivables and other property?
  • How do the S corporation and its shareholders report distributions of encumbered property, including situations where the debt exceeds the value of the asset distributed?
  • What are the ramifications to shareholders after liquidation regarding basis, payment of claims against the corporation, and transferee liability?


Jamison, Robert
Professor Robert W. Jamison, CPA

Professor Emeritus of Accounting
Indiana University

Mr. Jamison is Professor Emeritus of Accounting at Indiana University, Purdue University, Indianapolis (IUPUI). His...  |  Read More

Wilson, Amanda
Amanda Wilson


Ms. Wilson concentrates her practice on federal tax planning and structuring and represents clients in a wide variety...  |  Read More

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